Our last newsletter began a series of articles examining some of the basics of achieving success in the small business space. Last week’s newsletter focused on leveraging the branch. This week we center on how the small business effort should be organized within a bank or, for that matter, a non-bank player.

Small Business = Consumer = Retail 

To the extent possible, small business should be part of a bank’s retail banking group. Why?
 
* Lower-end small businesses make decisions much like a consumer does. They base their bank selection process on fundamentals such as branch convenience and opening hours. Even with the advent of remote deposit capture capabilities (RDC), branch location remains the dominant selection criteria for banks and for consumers as well. (Note: Decision criteria vary by company size and type. For example, professionals may be less branch sensitive than other groups.)
 
* Product requirements are limited and relatively few in number. Small businesses, particularly lower-end small businesses, have limited and straightforward product needs, much like the mass market consumer target. Complexity confuses both the small business and the consumer. Conversely, commercial bankers like complexity and expect to be paid for managing through it.
 
* Streamlining of processes, standardization, and a “no exceptions” policy are critical to consumer and small business success. Just as the products need to be simple, so too the processes. Given the amount of angst concerning current on-boarding processes at several banks we know, neither the retail nor commercial banking units are where they need to be in many customer service areas. Nonetheless, retail bankers operate with greater sensitivity to the need for cleaner processes and appear more focused on addressing this problem area.

“No exceptions,” or at least limited ones, are also critical to small business success. Exceptions increase operational costs, and most banks do not charge enough to make up the added time required to fulfill a request. Even more important, exceptions related to credit quality or structuring are more prone to result in credit problems. Retail bankers are more comfortable operating in a factory-like environment and often employ internal systems that have greater flexibility to meet exception requirements when they occur. (Note: Beware the small business group that generates substantial exceptions.)
 
* Many commercial bankers just don’t get small business. And, don’t want to. Our experience has been that commercial bankers and retail bankers are very different breeds. Too many banks operate with an informal caste system in which, frankly, the commercial bankers are of a higher order than the retail banker. That system continues to exist even though at many of these same banks retail is driving an increasing percentage of the bank’s bottom line. While this is changing given the economic power of retail and small business, old mindsets take a long time to evolve.

When small business does report to the commercial side of a bank, those bankers sometimes try to “commercialize” the small business effort. Progress that has been made using credit scoring slows down; credit underwriting for small business increasingly resembles the middle market approach; call levels decline. Typically, when some segment of small business is housed under commercial, say beginning with companies in the $5 million revenue range, those companies get ignored. Commercial bankers (and I was once one of them) want bigger clients and want to focus on bigger numbers. Training, culture, and compensation all drive them to larger names.

Unless the commercial group has a dedicated lower-end middle market effort (for example, companies from $5-15 million) those companies will not have a marketing/sales spotlight on them. In the retail world, they would be seen as big fish; in the commercial world, they are at best a nit and at worst an annoyance.

Note: We can also name several instances in which a lifelong commercial banker took over a small business group and did a great job. We also know instances in which small business operates successfully within a commercial environment. However, in our view these are atypical exceptions.
 
Should Small Business Operate as an Independent Group?

A few banks have established small business as an independent group on the same organizational line as the retail bank. While this may be appropriate for larger small businesses, organizational friction may result when smaller companies are involved.

Certainly banks should link companies up to $3-5 million to the branch, relying to the extent possible on branch bankers to sell and service their needs. Above that size, complexity and service requ

However, two reasons point to even growing small businesses remaining in the retail organization. First, migrating accounts is difficult in the best of circumstances. Basically, it should be avoided unless there is a clear economic rationale for doing so (either reduced costs or potentially higher revenues). Second, a small business group that focuses on larger names ($3-to-$5 million and above) can be a unit within retail, keeping any handoffs under the retail umbrella.
 
No One “Right” Approach Exists.

Every company is different, and we have learned long ago that what may be appropriate for one bank is inappropriate for another. Given our experience in the industry, we can cite instances in which just about every imaginable organizational model succeeds in some banks and fails in others. Management needs to assess its own priorities and pitfalls before deciding on its right organizational approach. In most cases, our bet is that its assessment will lead to Retail.